Pandemic and war in Ukraine – Central banks in the midst of economic uncertainty


Continue with ultra-accommodating policies or close the tap at the risk of stifling growth? Central bankers are navigating by sight amidst many uncertainties.

The headquarters of the European Central Bank in Frankfurt (Germany).


“Until recently, central banks could already not engage in a post-Covid world at the risk of appearing too optimistic”, reminds AFP William de Vijlder, chief economist of BNP Paribas. But “the situation today is much more difficult.” The war in Ukraine and the economic sanctions imposed by the West have led to a spike in the prices of oil, gas, wheat and many raw materials in recent days, as well as aggravation of difficulties in the supply chains of which it is difficult today to measure the consequences.

“The effects of the crisis in the short term are inflationary, but on growth it is more difficult to identify and this makes the task of central bankers very difficult”, note analysts from the American bank Wells Fargo. This is particularly the case for the European Central Bank (ECB) at a time when war is hitting the continent’s borders, jeopardizing the strong economic relationship with Moscow and driving up the prices of energy which households and businesses depend on.

Even more complicated situation

“Before the war, the ECB was already trying to avoid breaking the economic recovery,” recalls Gregory Clayes, economist at the Brussels Bruegel Institute, stressing that “the current situation is complicating things even more.” Before the first bombs, the Frankfurt institution seemed ready to gradually stop its purchases of public debt this year, then to raise interest rates for the first time since 2011.

The invasion of Ukraine complicates this prospect and could lead to an adjustment of the crisis response Thursday during a meeting of the Board of Governors. Faced with the American Central Bank (Fed), the ECB “was already in a different pace of exit from the pandemic” of Covid-19, notes Neil Wilson, analyst for “The asymmetry with which the situation in Ukraine affects the United States and Europe will only magnify this difference.”

The EU is more dependent on Russia than Switzerland for oil and gas. “The damage for the EU will therefore be more pronounced”, explained to “20 Minuten” Matthias Geissbühler, chief investment officer of Raiffeisen Switzerland. He is also reassuring about the rise in the franc, which is close to parity with the euro: “if we take into account the real exchange rate corrected for inflation, the franc has not appreciated much. » In question: high inflation abroad while it is much lower in Switzerland.

The rise in prices in the euro zone is thus almost offset by a franc which appreciates at the same time. “In this inflationary context, the strong franc is less penalizing for exporting companies,” explains Matthias Geissbühler. “Given the high inflation rates abroad and the stability of the dollar, I consider that the franc is currently valued fairly,” he judges. In addition, several experts believe that the SNB should not raise its key rate (-0.75%) at its next meeting at the end of March.

Washington wants to act

On the American side, the Fed is still betting on “a series of increases” in interest rates in the wake of a first increase in March, its president Jerome Powell reiterated on Thursday. According to him, it is “too early” to say whether the war will change things. “It’s easier” for the Fed, judge Gregory Clayes because it enjoys strong growth, almost full employment and high inflation linked more to demand from Americans than to the rise energy prices, unlike Europe.

In addition, “the rise in wages is more evident in the United States than in Europe”, recalls William de Vijlder, and could fuel the rise in prices, already at their highest for forty years. Faced with inflation at its highest for thirty years and the fear of seeing wage increases accelerate it, the Bank of England has already raised its rates twice, now at 0.5%.

Subject to very low inflation for years, Japan is one of the few major countries to maintain an ultra-accommodative policy, still not achieving its inflation targets: prices are expected to stagnate for 2021/22 and the inflation to reach 1.1% in 2023/24, according to forecasts by the Bank of Japan.

(afp / date of birth / reg )

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